IG Markets - Trading Wrap

It’s been a pretty
crazy day in Asia given all the information the markets have
had to price in and absorb. The end result has been another
move north in the USD, with the dollar index (DXY) the
highest level since September 5, and US futures moving
in-line with the USD, while Asian equities have found good
buying interest.

The flows in sterling have been
interesting with cable pulling back to 1.5073, while EUR/GBP
saw strong inflows, with 0.8774 the high. Interestingly the
market seemed to either take profits, with some players
looking to square and reverse positions, and while the
fundamental picture in the UK looks bleak, we get the sense
that the market may ‘buy the fact’ with regards to the
Moody’s downgrade. We know that both Fitch and S&P still
have negative ratings on the UK, so there is every chance
(more so Fitch) that more downgrades are on the way. The
open of the FTSE and gilt market will be interesting and
while yields should rise, we’d expect this to present
itself with a buying opportunity given previous moves in
both the US and French bond market post-downgrade. In the
case of France, ten-year yields actually outperformed German
bunds in the week following the French downgrade in January
2012.

Cable is still our preferred way to express
sterling bearishness, although short GBP/SEK looks good as
well. In a world where the trading community is constantly
looking for the next JPY-styled move, sterling seems to be a
front runner. With the BoE showing no concern for inflation,
the bank has given a green light for traders to sell pounds.
We prefer selling rallies to the 2012 low of 1.5271 though,
given the current positioning of traders.

Japan is the Asian outperformer and our long
Nikkei/short S&P idea has started on the right track. The
weekend news flow has been all about Haruhiko Kuroda getting
the gig as the new BoJ head, with Kikuo Iwata as deputy.
While this speculation was tempered through the day with the
cabinet secretary telling the market that Mr Abe had not
chosen a governor, we feel this potential combination is
significant and very market friendly. Hopefully this will be
announced this week and from here Mr Abe’s appointment
will need approval in the upper house and cooperation from
the opposition parties will be key. We feel there are some
technicalities which will need to be addressed, but
ultimately if Mr Kuroda is appointed then it should pass
further down the line. Whether the BoJ can then do what Is
needed to get inflation to 2% is clearly debateable, and
that makes the April 4 BoJ meeting that much more
interesting as it will be the first key meeting under the
new senior management.

The ASX 200 is up 0.8%,
although it found sellers after lunch on a disappointing
China HSBC PMI print. The report showed further expansion of
China’s small business sector, but it was well below
expectations, and the export sub-sector reversed January’s
expansion print and went back into contraction. The Shanghai
Composite and AUD/USD fell also on the back of this print,
and it’s interesting to see an increase again in the
negative China narrative in different publications. In a
loose sense, any negative news about China could be
construed as positive as it feeds into the perception of a
RBA rate cut, which re-enforces the yield trade that has
supported once again today.

So, with all the
excitement in Asia, European markets should get off to a
mildly positive start, and although S&P futures are down
modestly they remain 0.3% higher than the close of the
European cash session. Our out-of-hours flows have been
heavily biased on the short side (68% of all open positions
have been short, although this does not separate new shorts
from those who have closed longs), which is what we’d
expect given the Moody’s downgrade; however the FTSE looks
set to only modestly underperform on a percentage basis.
Italy perhaps is the bigger issue now that needs to be
resolved, and the up-coming elections have the premise to
cause a spike in volatility. It seems the lower house is set
to be won by the centre left, but the real drama comes in
the 340 upper house elections. Polls close at 14:00 GMT
(01:00 AEDT), with results expected to trickle out an hour
or so later. Look for EUR/USD to push towards 1.3075 on a
hung parliament decision. When you have a country with such
high levels of public debt, the bond market will not be
happy with political instability and the risk is that some
of the trust the market has built up under Mario Monti’s
technocrat government will be un-done.

US markets
will also be keen to see if an agreement can be formed
between heavy-hitters Harry Reid, Mitch McConnell, John
Boehner and the President Obama in the short-term, so that
the CBO (Congressional Budget Office) can look over the
proposal, prior to the potential vote that would be needed
in both houses. San Francisco President John Williams
suggested the drag on GDP from the sequester could be as
much as 0.6%, although many feel the rhetoric from the
President (who actually came up with the idea) portrays this
situation as far worse. The talk in the market is that the
President is using the sequester to get the Republicans on
side to raise revenues by imposing higher tax on the rich,
so perhaps this is more a political exercise. Either way,
pushing the sequester back by another three months could in
theory make the impact on GDP worse.

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